APPENDIX 1
Memorandum submitted by OFWAT (PAC 00-01/145)
QUESTION 131
Water efficiency in Schools
Ofwat considers that water companies should work with schools to promote water efficiency in two ways:
— An education programme, which incorporates contact with schools to inform children about water and the need to use it wisely.
— Advice to schools on how they can save water in school buildings thereby reducing their bills.
Education
Companies have links with schools to promote messages about water, its sources, treatment, environmental importance and using it efficiently. Activities include:
— Provision of educational facilities (including classrooms and organised activities) at water company recreation sites such as reservoirs, organisation of visits to treatment works.
— Visits to schools with presentations or plays by fictional characters.
— Providing water education packs with material linked to the National Curriculum.
— Exhibitions at local zoos or farms or nature reserves visited by local school children.
— Production and distribution of interactive CD ROMs.
Companies plan to continue these links with schools and to develop them. All companies have included an educational element in their forward looking plans for 2001-05.
Reducing water consumption
Ofwat has advocated targeting water efficiency activities at the customers most likely to benefit from undertaking such actions: including large institutions and schools who can significantly reduce metered water bills by reducing demand. Measures which schools can take include installing cistern devices, infra-red or other urinal controls, spray taps and shower controls to reduce water usage in washrooms and toilets.
Northumbrian Water has set up a scheme to train caretakers to audit their school buildings. Yorkshire Water is working with schools in the Sheffield area, where the local energy department of the City Council is undertaking energy audits of their schools. The Water Conservation Team at Yorkshire Water offered advice on how these audits could be broadened to include water use in schools. One of the senior managers at Folkestone and Dover Water is a member of the local Education Business Partnership, which provides an interface between local businesses and schools.
Results of trials and studies (examples are attached at Annex A) indicate that there is scope for significant savings from auditing water use in schools and that the cost to schools of installing water saving measures may be recouped over a period of between two to five years depending on the savings achieved. Where savings are made they are achieved without a major change in behaviour by students and with no deterioration in hygiene.
Companies can link the education of the children and the reduction of school consumption by involving the children in projects to audit water use at their own schools. These projects can encourage pupils to take home messages about how to use water wisely.
Watermark
Watermark is an initiative led by The Buying Agency to develop a database to give public sector organisations reliable benchmarks against which to measure their water consumption. Among the organisations collaborating with The Buying Agency in the project are the DETR, the DfEE and the Environment Agency. Watermark will pull together consumption data from across the public sector (eg schools, colleges, offices and prisons etc), establishing benchmarks and identifying best practice. Initial data provided by the DfEE on schools' facilities and water consumption is currently being analysed to provide comparable benchmarking numbers. Benchmarking information will be accessible via a web site from April 2001.
Schools and other organisations will in future be able to input their own consumption data onto the site for comparison against benchmarks and gain access to water saving advice relevant to their activities. The web site will be promoted to schools through local activities and the educational process. Watermark is funded by the Invest to Save Budget (ISB) for an initial pilot period of two years. Further funding may be sought to extend the project beyond this period.
Report on water conservation in schools
Last year the Environment Agency (EA) commissioned a report into the prospects for water efficiency in schools (published in December 2000). The report was prepared following discussions with government departments (DETR and DfEE), water supply companies and water conservation equipment suppliers. The report described water efficiency measures suitable for schools and the project identified the main barriers to improving water efficiency as lack of finance and of awareness of the cost effectiveness of retrofitting water efficient fittings, and difficulties with accessing water meters (eg due to metering in pits at school boundaries).
The report looked at possible ways to overcome these barriers, in particular at possible sources of funding for water efficiency measures. These included the provision of grants for water efficiency, funds from schools' own budgets, loans or shared savings schemes (where the capital cost of the measures is paid from a share of the subsequent savings).
EXAMPLES OF CURRENT AND RECENT RESEARCH INTO WATER EFFICIENCY IN SCHOOLS
Chesswood School (Southern Water)
Project funded jointly by Southern Water, West Sussex County Council and the EA. The installed equipment comprised urinal controls, push taps in all washrooms and Save-a-flush bags in toilet cisterns. Flow restrictors were also fitted to all classroom taps and plugs supplied where missing. Water butts were fitted for the watering of garden areas.
The project has now been concluded and generated a 73 per cent reduction of water consumption. The study highlighted that the most cost-effective way to save water in schools is the installation of effective urinal controls, with a payback period likely to be less than one year. The results from this project are being used to produce a set of water efficiency guidance notes to help other schools in the region to improve their water efficiency in a cost-effective way.
School Audit Scheme (Yorkshire Water)
A joint project was undertaken (during 1997) by Yorkshire Water and Calderdale Council to test the effectiveness of a number of different water saving devices fitted in schools so that new installations in all council buildings may be considered. Thirteen schools were selected by their size, water usage per pupil and type of school. The installed equipment comprised sub-meters, automatic urinal flush controllers, flow restrictors, cistern dams, shower controls, self-closing taps and spray taps.
Overall consumption for the 13 schools decreased by 40 per cent (term time) and 70 per cent (summer holidays), compared to figures for the same period in 1996 measured from meter readings at the schools. This was largely achieved through the installation of urinal controllers. Overall water savings for the 13 schools calculated from the installation of water saving appliances showed a reduction in use of 9.5 ml/annum. A 24 month payback period has encouraged the council to expand the scheme to other schools and public buildings.
Greenhill School Project (Dwr Cymru)—Ongoing
This project is being undertaken by Dwr Cymru in co-operation with Pembrokeshire County Council and EA Wales. The study is scheduled to run over a number of years to test different water using devices in the same building situation, to provide robust comparison data.
A new sixth form block was constructed at the school. Rainwater is collected, exposed to ultraviolet treatment, and used for toilet flushing, with all the water using devices separately metered and monitored by logging equipment. Tap systems will be changed after each full year's cycle ie starting with infra red controlled taps, moving to push taps and then to conventional taps. "Waterless" urinals installed at present may be changed to controlled conventional urinals.
North West Water Schools Study—Ongoing
Working in partnership with the EA—North West Water have set up studies at two schools in the Warrington area to explore the total savings that can be achieved in schools from better demand management. The main aim is to compare usage for different purposes, analyse hourly variations, and raise awareness of water conservation. The project will be completed during 2000-01 and a report will be produced of the results and lessons learnt.
QUESTIONS 136 AND 138: OFWAT'S ASSESSMENT OF THE GLAS CYMRU PROPOSALS
Background
The board of Glas Cymru (Glas) announced on 3 November 2000 that it had agreed terms with Western Power Distribution (WPD) for the acquisition of Dwr Cymru/Welsh Water. Glas is a company limited by guarantee incorporated under the Companies Act 1985. It would be owned by a body of members who have no financial interest, rather than shareholders, and its board would be accountable to these members. Glas' proposals had two main elements that distinguished them from how other companies in the sector operate:
— Glas would be wholly debt-financed rather than being shareholder-owned; and
— the day to day management of the operations and customer services would be entirely outsourced to third parties.
Both were constituents of the earlier restructuring proposals from Kelda plc for Yorkshire Water. However, that proposal was for a mutual company which would have been owned by its customers, rather than a company limited by guarantee.
OFWAT'S CONCLUSIONS
Ofwat issued a consultation paper[7] on the proposals on 10 November 2000 and announced its conclusions following the consultation in a statement[8] (and associated papers) on 31 January 2001.
Ofwat was satisfied that Glas had taken reasonable steps to minimise the risks inherent in the new structure. It had carried out an appropriate level of customer consultation and had demonstrated its independence from the existing owner, WPD. Whilst some uncertainties remain, such as the long-term financial flexibility of the structure and the incentives for ongoing efficiency savings, these can only be assessed over the longer term. To set against these risks, the Glas proposals offer the potential, if the company is efficiently managed, for significant benefits to customers in terms of reducing the cost of capital and eventually in bill reductions.
In the light of these and the detailed considerations set out in Ofwat's statement, Ofwat concluded that provided that Glas agrees to a number of conditions, it should not object to the proposals and Glas should be allowed to proceed to test whether it can secure the financing required, at an investment grade credit rating consistent with its financing plan. The six conditions set out in Ofwat's paper were that Glas:
(i) agrees to the package of licence modifications set out in Ofwat's position paper;
(ii) gives a public commitment on the timing and scale of customer rebates;
(iii) makes public its incentive schemes for executive management;
(iv) provides a public statement on its commitment to limiting its activities to the single purpose of providing water and sewerage services;
(v) gives a public commitment to appointing the members of Glas on the basis of best practice;
(vi) confirms that the rights proposed for bondholders do not impede the Director's duties under the Water Industry Act 1991.
Ofwat does not believe that the decision should be seen as a precedent for the industry as a whole. A number of factors in the Glas case might not be readily replicated in other cases. These include the broad support of the democratically accountable body, the National Assembly for Wales (NAfW); the wish by the current owner, WPD, not to be involved in the water sector; the significant discount in the purchase price to Regulatory Capital Value (RCV); and the clear independence of the purchaser and seller.
Ofwat considers that the possible precedent effect cannot determine the approach to Glas, but would share the concern expressed by UK Government Ministers if significant numbers of water companies were to seek to follow, before the model of a wholly debt-financed, outsourced company had been tested. However, Ofwat will continue to review with care and fairness any proposals put to us against a similar framework.
Ofwat's Analysis
The structural risks identified in the consultation were:
— In the absence of pressure from shareholders, would incentives for continuing efficiency be maintained under these proposals?
— Are there risks and benefits to customers from the Glas proposals, which are not present in the current shareholder model?
— Would the complete outsourcing of its operations leave the management of Dwr Cymru in a position to maintain proper control over its functions? Would the ability of the Drinking Water Inspectorate (DWI) and the Environment Agency (EA) to prosecute for failures to meet water quality and environmental standards be compromised under the proposals?
— Had Glas conducted a proper customer consultation given that it proposed to introduce a new type of ownership for the regulated business?
— Was Glas fully independent of the existing owner WPD?
The public consultation confirmed that the issues identified by Ofwat were those which concerned others. In particular, the issues of incentives for efficiency, the control of outsourced operations and whether customers would face increased risks due to the limited financial flexibility of the structure were raised by many respondents. Ofwat's detailed assessment of each of the issues is set out in the position paper of 31 January 2001.
COMPARISON OF THE GLAS PROPOSALS WITH THOSE PUT FORWARD BY KELDA
Ofwat's views on the Glas proposals are consistent with the statement[9] made by the former Director General, Sir Ian Byatt, on the proposals put forward by Kelda plc for Yorkshire Water in June 2000. Sir Ian Byatt discussed his views on these proposals with the current Director, Philip Fletcher, who agreed with him.
In making his statement, Sir Ian Byatt also set out a framework for assessing all subsequent restructuring proposals. Glas' proposals were assessed against this framework (as set out in the section on "Ofwat's Analysis") to ensure consistency. Ofwat's assessments of the Kelda and Glas proposals against these criteria are set out below.
Incentives for continuing efficiency
The consultation confirmed that the incentives for efficiency might not be maintained under the Kelda proposals.
These concerns have not been entirely eliminated by Glas, but Ofwat considered that the proposals and conditions would substantially mitigate the risks. This action includes incentivisation of the company's management (details of which it will be required to publish); maintaining a majority of non-executive Directors to provide the board with a commercial focus; and the role of MBIA (the proposed guarantor of a large proportion of Glas' bond issue) in closely scrutinising Glas' performance.
Risks and benefits to customers
Kelda's proposals failed to identify any clear benefits for customers. Customers were concerned that under a mutual ownership structure they would bear the additional risks. Customers would be the ultimate owners of Yorkshire Water. There was no offer of a reduction in the customers' bills.
Glas would be required to maintain significant reserves as a buffer to protect customers against business and other risks. Glas would not be owned by customers but by up to 200 "members".
In addition Ofwat will require Glas to make a public commitment to providing customer rebates which may provide further pressure on management to perform and be publicly accountable for Dwr Cymru's performance.
Regulators (including the quality regulators) to be content with accountability arrangements under the proposals
In the Kelda proposals Ofwat was concerned about how the Yorkshire Water Mutual (YWM) would maintain control over operations. The DWI and EA also expressed concerns about a blurring of responsibility for water quality and environmental matters.
Glas has agreed in principal to licence modifications aimed at satisfying the concerns of both Ofwat and the quality regulators. Glas will be required to submit a Procurement Plan to Ofwat. This will include a condition specifically prohibiting Glas from delegating responsibility for any of its statutory functions.
Practical concerns around separation of asset ownership and competitive procurement need to be addressed
There was concern amongst respondents to the Kelda consultation that the initial contracts would be let by YWM to Kelda without competitive tendering.
Glas would "inherit" contracts that had been competitively tendered by the current owner, WPD. Because WPD does not wish to be involved in the water industry the risk of a conflict of interest arising in the letting of the contracts is minimised.
Glas would be required to set out, in its Procurement Plan, its timetable for competitive tendering of contracts and an assessment of the contestability of these markets. Glas understands that its contract prices would not simply be "passed through" to customers at a price review. Its performance would continue to be compared with other companies'.
Customer consultation
Under Kelda's proposals ownership would pass to customers. Their informed consent was required. Public meetings demonstrated a significant degree of hostility to the proposals from Yorkshire customers.
Since Glas' plans do not involve a transfer of ownership to customers the consultation requirements need be less onerous then for YWM. However, Ofwat believed that Glas had carried out an appropriate level of consultation with customers. In addition Ofwat's Customer Service Committee (CSC) for Wales sought to draw attention to the proposals and chaired two public meetings. There is no evidence from either Glas' research, or the public meetings, that customers had any strong objections to the proposals. Other stakeholders in Wales, notably the NAfW and CSC, have expressed their broad support.
Independence from existing owner
The Directors of the YWM failed to demonstrate that they were independent of Kelda. The price to be paid for the assets was equal to the Regulatory Capital Value (RCV) at a time when Kelda's shares were trading at a significant discount to this value. Kelda wished to retain an ongoing "interest" in the YWM through the initial contracts. This was critical to the ongoing business of Kelda.
The Glas board would have a majority of non-executive Directors with no current or past association with Dwr Cymru. Whilst two of Glas' current executive Directors are former Directors of Dwr Cymru, both have resigned and they hold no shares in the current owner. None of the Directors has any association with WPD, who wish to leave the water industry. Furthermore, the price negotiations appear to have been conducted on an arm's length basis. The purchase price agreed represents a significant discount to the RCV.
Office of Water Services
February 2001
7 The proposed acquisition of Dwr Cymru Cyfyngedig by Glas Cymru Cyfyngedig: A consultation paper by Ofwat, November 2000. Back
8 The proposed acquisition of Dwr Cymru Cyfyngedig by Glas Cymru Cyfyngedig: A position paper by Ofwat, January 2001. Back
9 The proposed restructuring of the Kelda Group: a preliminary assessment by the Director General of Water Services, July 2000. Back
